Three European Coca-Cola bottlers to merge

By Martinne Geller

5 Min Read

Bottles of Coca-Cola are seen at the Safeway store in Wheaton, Maryland February 13, 2015.Gary Cameron

LONDON (Reuters) - Three European bottlers of Coca-Cola (KO.N) drinks have agreed to merge in what will be one of the continent's largest consumer products deals ever, as they hope greater scale and cost cutting will revitalize sluggish soft drink sales.

Coca-Cola Enterprises CCE.N said on Thursday it would combine with Coca-Cola Iberian Partners (CCIP) and the German bottling business of Coca-Cola to create a new company that will be the world's largest independent bottler of Coke drinks by net revenue, with business in 13 countries including Spain, France and Britain.

The transaction will give the new company, Coca-Cola European Partners (CCEP), a value of 28 billion euros ($31 billion) including debt, a source involved in the deal said, adding that was based on the core earnings of the companies, planned synergies and CCE's current valuation.

CCEP will have annual revenue of $12.6 billion and earnings before interest, tax, depreciation and amortization (EBITDA) of $2.1 billion.

"It's a major milestone and major transaction that will benefit all parties involved," said Coke Chief Executive Muhtar Kent on a conference call. "There's no question we all believe that increased investment potential will lead to a better trajectory in terms of increased revenue growth going forward."

CCE, whose drinks include Coke, Fanta and Capri-Sun, is struggling with weak sales in Western Europe, where austerity-hit consumers are drinking less soda, forcing producers to discount them, which hurts revenue and profit.

Combining the bottlers, which buy drink concentrate from Coca-Cola and package and distribute the drinks, will remove duplicate functions and free up cash to be reinvested in marketing and sales.

CONTINUATION OF STRATEGY

The formation of CCEP is the latest example of bottlers consolidating to face industry challenges. Coke and SABMiller agreed in November to combine their soft drink businesses in Africa, while four Coke bottlers in Japan merged in 2013. The German and Spanish bottlers themselves are also the product of several bottlers merging.

"This is not something that just came out of a hat," said CEO Kent. "It's an evolution of what you've seen in other parts of the world."

CCE shareholders will receive one share in the new company and a one-time payment of $14.50 a share. The cash portion, about $3.3 billion, will be funded via new debt issued by CCEP, the companies said.

The deal is structured as a so-called tax inversion, with CCE moving corporate headquarters to London and cutting exposure to higher U.S. taxes. CCE, now based in Atlanta, used to be the biggest Coke bottler in North America, but sold its U.S. operations to Coke in 2010, leaving it operating solely in Europe.

CCE itself was spun off from Coca-Cola in 1986 as a way to boost Coke's profit margins and balance sheet by separating the capital-intensive, low-margin bottling business into a different company.

CCE shareholders will own 48 percent of the new entity, with CCIP's shareholders owning 34 percent. Coke will own 18 percent. Between the three parties there will be 17 board members, a factor causing concern about accountability for some investors, said Bernstein Research analysts. They also noted concerns about the "somewhat vague" cost-savings targets and the tax rate not being lower.

The merger is expected to result in savings of $350 million to $375 million within three years of closing.

"Net-net, we see synergies, look for clarity on cross-market accountability/cooperation and believe regulatory hurdles are limited," Bernstein said.

CCEP will be incorporated in London and its shares will trade on Euronext Amsterdam, the New York Stock Exchange and the Madrid Stock Exchange.

While Coke's CEO said the focus now was on executing the current deal, industry observers said there could be scope down the road for more consolidation. Europe's other sizeable bottlers include Coca-Cola HBC (CCH.L) Coca-Cola Icecek (CCOLA.IS).

John Brock, current chief executive of CCE, will be CEO of the new group, while Sol Daurella, executive chairwoman of CCIP, will be chairwoman.

Shares of CCE were up 2.8 percent in New York, where Coca-Cola shares were down 0.5 percent. News of the deal was reported last week by the Wall Street Journal, which sent CCE shares higher.